The “Servitization” of Manufacturing is taking the High-Tech Industry by storm! By definition, Servitization is a transformation from selling products to delivering services. It typically involves two components:
- The idea of a product-service system – an integrated product and service offering that delivers value in use.
- A “Servitized” organization which designs, builds and delivers an integrated product and service offering that delivers value in use
In more practical terms Servitization turns the product–service offering into a “utility” that the customer pays for on a subscription basis. Under this model, the customer pays a monthly or annual fee equal to the amortized cost of the equipment plus the value of services provided for a specified period of time.
The concept of Servitization is nothing new. As early as the 1950’s, manufacturers provided their customers with the option to lease equipment with services attached to the lease agreement. In the late 1990s and early 2000s, companies like ABB and GE begin to offer tperformance based service contracts to their customers.
Servitization is more than just a pricing strategy. It is an overall business model that attempts to maximize and monetize value in use to the end-customer. This requires a manufacturer to proactively identify all the services that an end-customer may require over the lifecycle of equipment operation, understand the value that the customer assigns to these services, build this value into the subscription pricing model, and then deliver on that promise.
The trend toward Servitization has picked up steam in recent years for a number of reasons. First, market participants (i.e., OEMs and End-customers) have a greater appreciation of the strategic value of service to their overall business models. Second, manufacturers recognize that service can generate more revenue over the lifecycle of the equipment than the actual purchase price of the equipment itself. Third, the Great Recession forced many manufacturers to rethink the economics associated with how their customers justify the acquisition of new equipment. Fourth, service tools and technology are now available that facilitates the design and operation of an integrated product-service system in a cost effective and real-time basis.
Ultimately, it’s the technology that is having the greatest impact on advancing Servitization business models. There are some basic building blocks that any company will need to implement in order to deliver on the promise of Servitization. First, they’ll need a state-of-the-art service management system. It needs to perform the basic activities involved in managing a service organization (e.g., dispatch, scheduling, parts management, etc.). Second, they’ll need to have a way to connect with and monitor the condition of equipment within their serviceable installed base. They will also need to integrate this information into to their back-end service management system. The third step is a mobility solution to communicate with people in the field. Finally, analytics are needed to evaluate what’s happening. Most companies will probably benefit by using a big data solution, as well, so they can look at unstructured data from their installed base and the customer’s environment at large, and start to analyze, predict and forecast.
In summary, Servitization is a transformational process that requires manufacturers to rethink all aspects of their business from marketing and sales, to pricing and financial management, to service delivery infrastructure. The benefits of Servitization are great including the ability to build a multiyear annuity stream, gain account control, and create deeper and longer lasting relationships with customers.
I’d love to get your thoughts on Servitization. Let me know if your company is pursuing Servitization. What benefits do you expect to achieve? What obstacles remain in the way to realizing these benefits? Last but not least, if feel free to schedule a strategy session with me if you want to discuss how Servitization could impact your business.